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2010 Update to Preferred Stock Investing Now Available!
Readers of my book, Preferred Stock Investing, Third Edition, are entitled to free periodic updates to the preferred stock tables presented throughout chapter 15 of the book as long as the Third Edition is in print. Providing free periodic updates helps keep readers of Preferred Stock Investing up to date.
The 2010 update to Preferred Stock Investing is now available!
And I am also happy to announce that as a special service to readers, the 2010 update goes beyond an update to the preferred stock tables found in chapter 15. In this update I also take the opportunity to provide you with the results of the "CDx3 Income Engine" (the preferred stock investing method explained throughout the book) as implemented throughout the Global Credit Crisis (2007 - 2009). The nature of the preferred stock market since June 2007 deserves special attention and the 2010 update to the book would not have been complete without wrapping up the method's performance during these historic (extreme) conditions.
Specifically, the 2010 update to the Third Edition of Preferred Stock Investing includes updates to the following chapters:
Preferred Stock Investing, Third Edition is one of the most highly reader-rated books of any kind available for sale in the United States (Amazon 4.5 stars). To receive the free 2010 update to Preferred Stock Investing, Third Edition just follow the instructions on the first page of chapter 15 in the book.
If you have yet to pick up your copy of Preferred Stock Investing, Third Edition you can do so at any of your favorite online retailers (see retailers | see reader reviews). Please pick up your copy today then follow the instructions on the first page of chapter 15 to download the free 2010 update.
Just Posted On The Preferred Stock Investing Reader's Forum: The opportunity for preferred stock investors created by the Wall Street Reform and Consumer Protection Act is described in the Preferred Stock Investing Reader's Forum post from July 23 titled "Financial Reform Bill - What's In It For Preferred Stock Investors." That article itemizes 19 trust preferred stocks and shows their July 23 average market price of $23.93 per share. The trust preferred stocks that qualify for the list changes a bit with time since one of the criteria is that you only want to consider issues that are currently selling for less than $25.00 per share. Interestingly, the current (August 2) list of qualifying trust preferred stocks (see the Last Month's CDx3 Investor Results article below) shows 22 preferred stock issues with an average market price of $24.23; prices of the preferred stocks affected by the Act have increased by 1% just in the last two weeks. (jump to Forum)
On July 21, 2010 the U.S. Government delivered the opportunity that I wrote to you about last month. The Last Month's CDx3 Investor Results article itemizes what we now know and provides you with a list of 22 specific trust preferred stocks that are going to be the first to be affected by Section 171 of the just-signed Wall Street Reform and Consumer Protection Act. Look it over and ask yourself: what other investing opportunity have you ever known so much about, and known it in advance? (jump to article)
Beginning this month, the Special Announcement article is going to provide you with an updated list of trust preferred stocks (TRUPS) that will be among the first to be affected by Section 171 of the Wall Street Reform and Consumer Protection Act. Remember that subscriber's to the CDx3 Notification Service, my preferred stock email alert and research newsletter service, receive this same list with all of the trading symbols. This month's list starts with 22 of the highest-rated, highest-quality trust preferred stocks. Secondly, I have summarized some of the research from my book, Preferred Stock Investing, Third Edition, and am making it available to brokers, financial planners and investment groups for free. (jump to article)
In the CDx3 Company Spotlight article I introduce you to insurance provider W.R. Berkley. W.R. Berkley is a $4 billion company founded in 1967. In 2008, when the Global Credit Crisis was in full bloom, Berkley decided to start a new business unit called FinSecure, selling various types of insurance and services specifically to mortgage lenders. How did that turn out? (jump to article)
The CDx3 Question of the Month is presented both here and on the Preferred Stock Investing Reader's Forum. If you visit the Forum you can test your knowledge by clicking on your answer to the question. You will receive an automatic email that provides you with the correct answer and my explanation. Or you can just read the answer in the below CDx3 Question of the Month article. This month's question is at the heart of the opportunity created by the new Wall Street Reform and Consumer Protection Act. Specifically, I ask preferred stock investors "When does the 'call date' of a preferred stock occur?" The answer to this question is one of the key criteria for identifying the trust preferred stocks that will be among the first affected by the Act and is used to create the TRUPS tables that you see throughout this CDx3 Newsletter. (jump to article)
Why wait until next month's CDx3 Newsletter to find out what is going on in the preferred stock marketplace? Throughout the month I post regular research articles on the Preferred Stock Investing Reader's Forum and make them available to you for free. In the Free Special Offer article below I provide you with a link that allows you to receive my posts via an email message rather than having to visit the Forum to see what's new. Any time a new article is posted, you will receive a message in your email inbox automatically - free. (jump to article)
Coming Up For Preferred Stock Investors: The Wall Street Reform and Consumer Protection Act was signed into law on Wednesday, July 21. Capital One was the first Big Bank scheduled to hold their quarterly conference call with investors after the signing of the Act. On Friday, July 23, Capital One held their previously scheduled investor conference call to go over their quarterly results. As he concluded his prepared remarks, Capital One CFO Gary Perlin put investors on notice regarding the redemption of the Big Bank's trust preferred stocks, saying as much as he could but no more than he had to. He made the statement that we will now be hearing from our Big Banks, one after another. See Perlin's statement in the Next Month's Sneak Peek article. (jump to article)
I look forward to reporting back to you in next month's issue of the CDx3 Newsletter.
Wall Street Reform And Consumer Protection Act Signed Into Law
22 Trust Preferred Stocks First Up To Deliver Gains To Preferred Stock Investors
It's official. Section 171 of the Financial Reform Bill (officially known as the Wall Street Reform and Consumer Protection Act), signed into law on Wednesday, July 21, 2010, creates what is probably the single most significant opportunity for preferred stock investors in history.
The opportunity for preferred stock investors is as unique as the sequence of extreme events that led to this new law and its provisions.
Here is a list of the 22 highest rated, highest quality preferred stocks that will be the first to be affected by the new law (sorted by market price). This list updates and expands the similar list that I first presented to you last month. As you can see by the Effective Annual Return (EAR) column, the potential here for preferred stock investors is significant (trading symbols are provided to subscribers to the CDx3 Notification Service, my preferred stock email alert and research newsletter service).
What makes this opportunity so significant for preferred stock investors is that Section 171, titled "Leverage And Risk-Based Capital Requirements" and authored by Senator Susan Collins, delivers the one ingredient that investors never have enough of; namely, advance knowledge.
What We Now Know (In Advance)
Now that the Act has been finalized, look over the below bullet list of what we now know about this opportunity and ask yourself how many investing opportunities have come along in your lifetime where you not only knew all of these things, but knew them in advance.
As a preferred stock researcher, I do not know of another such preferred stock investing opportunity in history.
Trust Preferred Stocks In The Cross-Hairs
There are three types of preferred stocks - traditional preferred stock, trust preferred stock and third-party trust preferred stock (see chapter 2 of my book, Preferred Stock Investing, titled "Creating A New Preferred Stock"). Section 171 stipulates that our Big Banks (assets greater than $15 billion) will no longer be able to count trust preferred stocks (TRUPS) toward "Tier 1 Capital," one of the key values that regulators tally up when measuring a bank's reserves.
That means that once this provision kicks in on January 1, 2013, many of our Big Bank's reserves are going to come up short. The simplest and most obvious way for a bank to return their Tier 1 Capital to the land of respectability would be to retire ("call") their TRUPS and replace them with new traditional preferred stock issues (traditional preferreds are still allowed to be counted toward Tier 1 Capital even though trust preferreds are not).
That puts currently-trading TRUPS that are callable by January 1, 2013 directly in the cross-hairs. TRUPS that are callable by January 1, 2013 will be the first to be affected by the new law.
7.24% Annual Dividends Plus Capital Gain
When a new TRUPS is first introduced to the marketplace, its "call date" is published in the issue's prospectus. The call date is five years after the date of introduction. On the call date the bank regains the right to "call" (purchase back from you) your shares and, if they do so, they must pay you $25.00 per share regardless of your original purchase price and regardless of the then-current market price.
So if you purchase your shares today for a market price less than $25.00 you position yourself for a nice capital gain in addition to the above-average dividend income that you will be earning in the meantime.
The list of 22 TRUPS that you see here in Figure 1 are trust preferred stocks that:
While we cannot say with certainty that these TRUPS will be called (that remains up to the bank), it is not clear why the issuing bank would not seek to do so since Section 171 removes the primary benefit of TRUPS to the bank (boosting Tier 1 Capital). The average annual dividend income from this list of 22 TRUPS, before we count any capital gain whatsoever, exceeds 7.2% right now.
The resulting list that you see here is provided to subscribers to the CDx3 Notification Service. The far right column shows you how adding a capital gain after receiving two years of dividends pushes your Effective Annual Return up substantially.
Learn To Screen, Buy and Sell The Highest Quality Preferred Stocks
Preferred Stock Investing includes the information, websites and other resources needed for you to be a very successful preferred stock investor. For those who would rather someone else do the research and calculations, I offer the CDx3 Notification Service. Subscribers to the CDx3 Notification Service receive an email alert when there are buying and selling opportunities coming up. Subscribers also receive their own non-promotional preferred stock research newsletter every month, have their own website that hosts the CDx3 Preferred Stock Catalog and have access to the CDx3 Discussion Group, the only online forum just for preferred stock investors.
UPDATED: This Month's Under $25 Trust Preferred Stock List
These 22 Preferreds Will Be Among The First To Come Under The Wall Street Reform Act
Beginning this month, this Special Announcement article will present an update to the list of trust preferred stocks (TRUPS) that will be among the first affected by Section 171 of the Wall Street Reform and Consumer Protection Act, signed into law on Wednesday, July 21, 2010.
By watching this list each month, you will be able to monitor this opportunity as the January 1, 2013 implementation date approaches (expect prices to generally increase toward $25.00 per share).
Since market prices change every day, the list of affected TRUPS selling for less than $25 per share changes as well. So I will provide you with an updated list in this Special Announcement article every month. These are the highest rated, highest quality issues that are going to be first affected by Section 171 of the new law that are also selling for less than $25 per share right now.
Section 171 created the largest single opportunity for preferred stock investors in history. The window of opportunity will be open for two-plus years (January 1, 2013), but like most investments, the highest returns will tend to favor those who get in earlier rather than later.
The new law disallows Big Banks (assets great than $15 billion) from counting their TRUPS in their "Tier 1 Capital" calculation, a measure regulators watch when assessing the adequacy of a bank's reserves. These Big Banks are therefore likely to retire ("call") their TRUPS and replace them with new traditional preferred stocks. Investors who hold shares of a TRUPS when it is called will receive $25.00 per share, so investors who purchase shares now for less than $25 position themselves for a capital gain on top of the above-average dividend income that they will be earning in the meantime.
By looking at the far right column, you can see the effect that adding a capital gain onto the regular quarterly dividend income has on your Effective Annual Return...courtesy of the U.S. Government.
Subscriber's to the CDx3 Notification Service (my preferred stock email alert and research newsletter service) are provided with an updated TRUPS list, including trading symbols, on page 7 of each monthly issue of the subscribers' newsletter, CDx3 Research Notes. Please consider becoming a subscriber to the CDx3 Notification Service today.
Brokers And Investment Groups: New Meeting Materials Now Available
As the most comprehensive research service available for the highest quality preferred stocks, all of the large, and many smaller, brokerage firms subscribe to the CDx3 Notification Service.
My Preferred Stock Investing Group Materials are intended for brokers with a group of clients or self-directed investment groups that are interested in learning something about preferred stock investing.
The Preferred Stock Investing Group Materials include a slide show (27 slides, PowerPoint Show format) and an accompanying handout that provides my commentary for each slide. The handout is available in color and black and white (PDF format) for easy printing.
The materials include my tips regarding how to select, buy and sell the highest quality preferred stocks and summarize much of the research from my book, Preferred Stock Investing. Specifically, the materials are organized into three parts:
Part 1: Approach and Objectives To Preferred Stock Investing
Part 2: How and When To Buy and Sell Preferred Stocks
Part 3: Preferred Stock Investing Resources
To request the Preferred Stock Investing Group Materials just send an email request to:
You will receive an auto-reply email message with current download instructions.
Who Are These Companies That Issue CDx3 Preferred Stocks?
W.R. Berkley (NYSE: WRB)
W.R. Berkley is a $4 billion property and casualty insurance company established in 1967 and headquartered in Greenwich, Connecticut. It operates in five segments of the property casualty insurance business: Specialty lines of insurance, including excess and surplus lines, premises operations, professional liability and commercial automobile; Regional commercial property casualty insurance; Alternative markets, including workers' compensation and the management of self-insurance programs; Reinsurance, including treaty, facultative and Lloyd's business; and International (Australia, Hong Kong, South America, the United Kingdom and Continental Europe).
2009 was a light year for disasters which is both good news and bad news for insurance companies. On the upside, there are fewer losses to claims but on the downside, it is harder for insurers to justify rate increases which impairs revenue growth.
Comparing Berkley's second quarter results over the last several years, we can see how revenues have flattened out. Interestingly, second quarter earnings per share have risen significantly. This improvement is largely due to two specific factors.
Since 2006 W.R. Berkley has added 19 new businesses, primarily through acquisitions. While it took a bit longer than expected to gain traction, these new units have started to produce results and are now adding to the company's bottom line.
Secondly, like most insurance companies, W.R. Berkley collects cash in the form of policy premiums and invests it, primarily in fixed-maturity securities. Berkley's portfolio has benefited from the huge uptick that most investors have seen over the last year or so, resulting in a bit of a windfall for the company.
The last time that I reported to you about W.R. Berkley was in July 2008. With the Global Credit Crisis just reaching its stride, the forward-looking company launched a new business unit called FinSecure LLC. FinSecure specializes in a variety of insurance products and services tailored specifically for mortgage lenders. From W.R. Berkley's 2009 Annual Report:
"FinSecure enjoyed strong performance in its first full year of operation in 2009. Formed in 2008, it offers an array of highly specialized property casualty insurance products for the mortgage-lending industry and trust managers. Its complementary loss control services are specifically designed to protect its target clients against risks arising out of their core business operations and/or certain specialty services they provide. Over the course of its 18 months of operation, FinSecure has established itself as one of the leading markets in providing insurance to financial institutions for lender placed, foreclosed and trust properties, and is well situated to build on that foundation in 2010. FinSecure also quickly gained traction during 2009 with standard and specialty property casualty products in its niche, and anticipates another year of strong but disciplined growth, with an emphasis on significantly expanding its position in these lines."
Launching FinSecure right into the teeth of the crisis was a risky move to be sure, but where others shied away W.R. Berkley saw opportunity and seized the moment.
Reader Note: The purpose of the CDx3 Company Spotlight article is to give you a sense of the types of companies that issue CDx3 Preferred Stocks. Companies that appear in the CDx3 Company Spotlight either currently, or in the past, have issued CDx3 Preferred Stocks. Since I am not familiar with your financial goals, resources or risk tolerance, my mention of these companies here should not be taken as a recommendation by me for you to buy, or not buy, securities issued by these companies. Companies can issue multiple series of preferred stocks, some of which may meet the CDx3 Selection Criteria while others do not.
When does the 'call date' of a preferred stock occur?
Like last month's question, this question is particularly important since it is at the heart of the opportunity that Section 171 of the new Wall Street Reform and Consumer Protection Act creates for preferred stock investors.
It is important for preferred stock investors not to confuse a preferred stock's "maturity date" with its "call date." The maturity date, for preferred stocks that have one (not all issues do), is similar to the maturity date of a certificate of deposit that you might purchase at your local bank. On the maturity date, the issuing company will purchase your preferred stock shares back from you at $25.00 per share, regardless of what you originally paid and regardless of the then-current market price.
Buying your shares back from you is referred to as "liquidating" your shares and the price that the issuing company will pay you on the maturity date is called the "liquidation preference" (one of many unnecessarily confusing investing terms). For most preferred stocks that are targeted at individual investors, the liquidation preference amount is $25.00 per share.
Having said all of that, individual investors often ignore the maturity date because it is generally set so far out as to have little impact on today's investing decisions. It is not uncommon for preferred stock maturity dates to be 20 to 30 years from the date of issue.
Most investors are more interested in what might happen in a closer timeframe. That's where the call date comes in.
The question this month for preferred stock investors:When does the 'call date' of a preferred stock occur?
Five years after the preferred stock is first introduced.
(C) Five years prior to the maturity date of the preferred stock.
The correct answer to this question is (A), five years after the preferred stock is first introduced.
For the first five years of a preferred stock's life, the issuing company is required to continue paying you the dividends specified within the issue's prospectus. Even if prevailing dividend rates in the U.S. economy go down after the preferred stock shares are issued, the issuing company must continue to pay you your dividends as specified in the prospectus.
But once the call date arrives, five years after introduction, the issuing company regains the right to purchase your shares back from you. Whether or not the issuing company calls a preferred stock issue is often determine by whether or not the company can save dividend expense by doing so. And the savings do not have to be as much as you might think. In fact, if the issuing company can save as little as .375% by issuing a new preferred stock at a lower dividend rate and use the proceeds to call an older, higher-paying issue, there is a 91% chance that they will do so (see Preferred Stock Investing, pages 217-218).
Section 171 of the just-signed Wall Street Reform and Consumer Protection Act provides another reason that a company will call a preferred stock. As explained in the Last Month's CDx3 Investor Result article above, this section of the Act eliminates the primary reason that Big Banks issue, and continue to pay dividends on, trust preferred stocks (one of the three kinds of preferreds and the one that is most favored by banks). Starting January 1, 2013 Big Banks will no longer be allowed to count the value of their trust preferred stocks toward their "Tier 1 Capital," a measure of their reserve strength.
Because of this new law, it is highly likely that our Big Banks will call their trust preferred stocks as their respective call dates arrive, starting with trust preferred stock issues with call dates on or before January 1, 2013. Shareholders will receive $25 per share in the event of a call. So investors who purchase shares today for less than $25.00 per share position themselves for a nice capital gain, in addition to the great dividend income, in the event of a call.
For a list of the targeted trust preferred stocks that are currently selling for less than $25 per share, please consider subscribing to the CDx3 Notification Service today.
You can submit your own preferred stock question: Submit your question.
Preferred Stock Market Research Now Available All Month Long - Free
Automatic Email Delivery Of Preferred Stock Market Research Now Available
Readers do not have to wait until next month's issue of the CDx3 Newsletter to stay plugged into the market for high quality preferred stocks. Preferred stock research articles, marketplace observations and preferred stock news from the financial press and other information are posted to the Preferred Stock Investing Reader's Forum (my "blog") throughout the month.
A separate window from FeedBurner (a Google service) will open on your screen. Enter and verify the email address that you want articles from the Forum to be emailed to as instructed. And don't worry - you'll never receive any spam from me and your email address will not be shared.
By receiving the articles as I post them via email, you do not have to visit the Forum in order to stay plugged into my research regarding the marketplace for the highest quality preferred stocks.
You are also invited to visit the Forum and comment on my articles.
Capital One CFO First To Put Investors On Notice: Looking At TRUPS Redemption
Expect This Statement From Our Big Banks, One After Another
Whether or not our Big Banks redeem (call) their trust preferred stocks beginning in January 2013 is a decision left to the bank. But once the current provisions of Section 171 of the Wall Street Reform and Consumer Protection Act kick in, our Big Banks really have little choice but to do so since the primary benefit of having these securities (being able to count them toward Tier 1 Capital) goes away.
Here is a statement from Gary Perlin, CFO of Capital One on a July 23 conference call just two days after the Act was signed into law:
"I'd like to note that the recent enactment of the [Act] may have an impact on the Tier 1 treatment of our approximately $3.5 billion of trust preferred securities and provides for a phase-in period expected to begin in 2013. Given the potential change in capital treatment of these securities, we anticipate that we will determine whether to exercise our rights to redeem our trust-preferred securities at or near the beginning of the phase-in period."
Officials from publicly traded companies stay far, far away from statements involving future events during such investor conference calls. Here, Perlin is trying to put investors on notice while not saying anything too specific that cannot be wiggled out of later. But the message is clear enough.
Another interesting point: during these investor conference calls, company officials read prepared remarks and then take questions from those on the call (mostly Wall Street analyst types). Mr. Perlin made this statement during his prepared statement before being asked about it. I am expecting near-identical statements to now be made by all of the Big Banks (assets greater than $15 billion) as they conduct investor meetings.
This is a big issue for our Big Banks and, given the enormous opportunity it creates for preferred stock investors, one that I will continue to keep you informed about.
I look forward to reporting back to you in next month's issue of the CDx3 Newsletter.
to screen, buy and sell the highest
quality preferred stocks by
the third edition of my book, Preferred
Stock Investing (see
retailers). The book identifies
the resources that you need to be a very
successful CDx3 Investor completely on
your own. If you would rather we do the
research and calculations for you I
CDx3 Notification Service
15 of Preferred Stock Investing
includes a list of all of the CDx3
Preferred Stocks issued since January
2001 and the investing results you
would have achieved had you invested in
them using the CDx3 Income Engine.
readers also receive free periodic
updates to the preferred stock lists in
chapter 15 as long as the Third Edition
of the book is in print.
take a look at
And if you
someone who might be interested in simple
for non-experts please have them send an email
they will automatically
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Chapter 15 of Preferred Stock Investing includes a list of all of the CDx3 Preferred Stocks issued since January 2001 and the investing results you would have achieved had you invested in them using the CDx3 Income Engine.
And readers also receive free periodic updates to the preferred stock lists in chapter 15 as long as the Third Edition of the book is in print.
Please take a look at www.PreferredStockInvesting.com. And if you know someone who might be interested in simple investing for non-experts please have them send an email message to:
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Many Happy Returns,
Doug K. Le Du
Copyright (c) 2010 by Doug K. Le Du
CD Times 3, CDx3, CDx3 Income Engine, CDx3 Investor, CDx3 Portfolio, CDx3 Preferred Stock, CDx3 Perfect Market Index, CDx3 Bargain Table are trademarks of Doug K. Le Du. All rights reserved.
Company logos are trademarks of the indicated companies. Service Marks (SM) are service marks of the indicated companies.
DISCLAIMER: The content of this CDx3 Newsletter is to be regarded as educational, rather than advisory. There can always be exceptions to trends and/or generalizations that may be discussed herein. Consider your financial resources, goals and risk tolerance before investing. You, and not Doug K. Le Du, are solely responsible for your own investment decisions.